ORLANDO, Florida, June 15 (Reuters) - After pushing back against the Federal Reserve's aggressive policy tightening for well over a year, persistently and prematurely betting on an elusive 'pivot', U.S. interest rate traders could be forgiven for finally adhering to the decades-old maxim "Don't fight the Fed."
But they're not ready to throw in the towel.
While traders no longer expect rates to be cut this year, they are refusing to follow policymakers' surprisingly hawkish guidance on Wednesday that rates will be raised by another half of a percentage point by December.
The implied rate on September 2023 Secured Overnight Financing Rate (SOFR) futures popped up to 5.35% after the Fed kept its federal funds policy target range on hold at 5.00%-5.25% but said it expected another 50 basis points of hikes this year.
That implied 'terminal' rate is lower than Fed officials' new year-end median projection of 5.60%. Traders are essentially pricing in one more quarter-percentage-point hike this year, but not two.
Resistance to the Fed's 2024 outlook is even fiercer. Traders have been dragged kicking and screaming up the central bank's hill over the last year, but the peak is in sight and they are betting on a steep downward path on the other side.
The Fed's new 2024 median fed funds rate projection announced on Wednesday is 4.60% and the implied December 2024 SOFR rate is 3.75%, meaning the market is expecting almost 100 bps of easing vis-a-vis the Fed's outlook.
When set against the implied 2023 year-end SOFR rate of 5.20%, traders are pricing in almost 150 bps of rate cuts next year.
Analysts at TD Securities reckon the Fed is done raising rates and will begin easing in December this year. Societe Generale's Stephen Gallagher wondered why, if nearly all Fed policymakers expect further hikes, they did not raise rates on Wednesday.
"There is no good answer to this question. The strength of these expectations is the crucial issue. If confidence were high, Fed officials would have hiked in June and not skipped as they chose to do," he wrote.
No matter how often and by how much the Fed raised rates since March last year and signaled more to come, rates markets consistently priced the end-2023 implied rate below the implied peak or terminal rate.
But confidence that the Fed will cut rates this year has clearly frayed.
After Wednesday's policy decision, statement, new economic projections and Fed Chair Jerome Powell's press conference, traders pushed implied 2023 year-end rates to within a few basis points of the prevailing terminal rate.
The implied December 2023 SOFR rate got to within a few basis points of the September SOFR rate, indicating that traders had whittled away almost all the expected easing by the end of the year.
This is the first time in more than a year no rate cuts have been priced into the 2023 SOFR futures curve. Just over a month ago, the curve implied around 100 bps of rate cuts in the second half of this year.
On the face of it, traders might want to take the Fed's hints. Betting on rate cuts has long been a losing trade, inflation - especially core inflation - is sticky, unemployment is near a 50-year low, financial conditions are still loose, and the March banking shock appears to be in the rear-view mirror.
This is the 'soft landing' backdrop against which policymakers raised their median policy rate outlook through 2025, and marked up their 2023 growth outlook significantly to 1.0% from 0.4%.
"More restraint will be necessary than we thought," Powell told reporters, referring to the broad-based shift higher in officials' interest rate outlook.
But old habits die hard, and in keeping with the past year or more, traders are not convinced.
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Jamie McGeever; Editing by Paul Simao
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the U.S. again. Focus on economics, central banks, policymakers, and global markets - especially FX and fixed income. Follow me on Twitter: @ReutersJamie